Fund Manager
Norm Lamarche
The Federal Reserve cavalry came to the stock marketsʼ rescue during the month of September with their rate cuts. The ensuing market rally not only unwound the August losses, but propelled indices to new all-time highs in October. This was the medicine (Tums for the financial indigestion) we were looking for that would allow confidence to return, as there are no specific surgical procedures to fix the financial system. The big global banks are now beginning to talk about their stomach problems and are reporting losses associated with their commercial paper exposures.
In the Energy world, crude hit an all-time high in September on the anticipation of a sustained global economic growth profile. Continued weakness in the U.S. dollar has also provided support to the whole commodity group. The Natural Gas commodity enjoyed better pricing in North America, after hitting August lows. A seasonally hot August provided some inventory relief, as injections were curtailed. Falling LNG imports into North America continued into August as shippers found better pricing in other continents.
The Canadian oil patch continues to lag other energy markets. The strong Canadian dollar has been a large contributor to this relative weakness. Compounding the dollar issue has been the negative consequences from the governmentsʼ (federal and provincial) tampering with the energy taxation regimes. Last October, the Federal Government announced measures to tax the Income Trusts directly. This year, the month of September caught industry and investors off guard! On September 18th, the Alberta government received the recommendation from the independent Alberta Royalty Review Panel. Faced with a growing worldwide understanding of the massive Oilsands, along with a very active mergers and acquisitions environment occurring in a higher commodity price world-order, the Alberta government set out to review the current royalty regime for both the Oilsands as well as for the conventional oil & gas business. The Oilsands taxation structure was created decades ago when Oilsands extraction was in its infancy and in a much lower oil price environment.
The industry today processes over a million barrels a day of Oilsands production and has now garnered attention and involvement from all international players as the Oilsands represent one of the few places for the large super-independents to access vast reserve opportunities. Shell, Total and the Chinese state companies have all recently acquired Canadian Oilsands companies and are planning substantial capital spending programs to develop the opportunities. The September report handed to the government recommended some “Draconian” changes. The proposals sent investors to the exits.
It has become apparent to investors, but more importantly, to the Alberta government, that the Panel, which is made up of non-industry people, used faulty assumptions as well faulty data (outdated 2005 cost data) in their evaluations that have resulted in misguided recommendations. While we believe there is room to alter the royalty regime somewhat in the Oilsands segment, the recommended measures to the conventional oil and gas segment are entirely inappropriate. While the Oilsands reserves represent the future of the Canadian oil patch, the conventional basin is old, mature and higher cost. The bigger players have largely left the conventional basin to the smaller independents to exploit. While we believe the conventional basin to be a profitable business, it is nevertheless, too small for the likes of EXXON and BP.
The feedback in early October from the Alberta government appears to acknowledge the economic realities and is providing relief to investors. While the stocks are recovering as a result, the uncertainty is keeping most buyers on the sidelines. The Alberta government will offer more color in late October. We believe the proposed measures will be more reflective of the economic realities facing their energy basin. Today, we would expect Canadian energy shares to rally with the greater clarity.
Basic material share prices led the rebound in September, reversing the August movement. Time horizons lengthened somewhat as investors filtered through the sub-prime fallout to focus on the greater economic opportunity that continues unabated, in the emerging world. Commodity prices pushed forward during the month, led by the precious metals. Gold and Silver rallied 12-16% while Copper, Nickel and Lead advanced 10.6%, 14.2% and 8.2%, respectively. With the improving visibility, the Funds continued investing during the period. The Funds continued the bottom-feeding in the Uranium space that began in August. Spot uranium prices have given up most of this yearʼs gains having dropped from $138/lb to the recent $70/lb level. As is typical of market recoveries, the seniors led the rally, leaving the smaller players behind. Copper giant Freeport McMorran, for example, corrected from $100/share to the mid -sixties in the August downturn. The stock traded in the $115-120 area recently in October. We would expect the remaining group to catch-up as capital markets continue settling down.
While the lower dollar has provided support to all commodities, it has provided fuel to the precious metals group. Spot prices for both Iron Ore and Coal are much higher than last yearʼs term prices. With labour and energy prices also trending higher, we can expect steel prices to follow suit in the near future. Bullion finished the month at its highest level since 1980! Gold will likely play an increasing role in investorsʼ portfolios as they seek havens against both inflation and a lower dollar.
We remain focused on the economic momentum worldwide. The massive capital spending cycle globally is unprecedented! The global economic landscape continues to be re-shaped. The old manufacturing base in the western world will remain challenged competitively and will continue to work through their costly transitions. The worldʼs largest economy remains stretched and tired and its recent credit difficulties in its financial system will likely keep the Federal Reserve on high alert. Notwithstanding the inflation that has become evident in the U.S. (largely as a result of the emerging worldʼs rapid growth), the Federal Reserve will likely err on the side of the weak economy and likely lower rates further. The economic weakness in the U.S. is seemingly playing well into the hands of the emerging nations, whose growth continues unabated. Now, however, it grows in a lower interest rate world than that which existed only months ago. Stay focused on the growth in the emerging world!
Norm Lamarche - Q3 2007 Commentary
Date Published
Fund Manager
The Federal Reserve cavalry came to the stock marketsʼ rescue during the month of September with their rate cuts. The ensuing market rally not only unwound the August losses, but propelled indices to new all-time highs in October. This was the medicine (Tums for the financial indigestion) we were looking for that would allow confidence to return, as there are no specific surgical procedures to fix the financial system. The big global banks are now beginning to talk about their stomach problems and are reporting losses associated with their commercial paper exposures.
In the Energy world, crude hit an all-time high in September on the anticipation of a sustained global economic growth profile. Continued weakness in the U.S. dollar has also provided support to the whole commodity group. The Natural Gas commodity enjoyed better pricing in North America, after hitting August lows. A seasonally hot August provided some inventory relief, as injections were curtailed. Falling LNG imports into North America continued into August as shippers found better pricing in other continents.
The Canadian oil patch continues to lag other energy markets. The strong Canadian dollar has been a large contributor to this relative weakness. Compounding the dollar issue has been the negative consequences from the governmentsʼ (federal and provincial) tampering with the energy taxation regimes. Last October, the Federal Government announced measures to tax the Income Trusts directly. This year, the month of September caught industry and investors off guard! On September 18th, the Alberta government received the recommendation from the independent Alberta Royalty Review Panel. Faced with a growing worldwide understanding of the massive Oilsands, along with a very active mergers and acquisitions environment occurring in a higher commodity price world-order, the Alberta government set out to review the current royalty regime for both the Oilsands as well as for the conventional oil & gas business. The Oilsands taxation structure was created decades ago when Oilsands extraction was in its infancy and in a much lower oil price environment.
The industry today processes over a million barrels a day of Oilsands production and has now garnered attention and involvement from all international players as the Oilsands represent one of the few places for the large super-independents to access vast reserve opportunities. Shell, Total and the Chinese state companies have all recently acquired Canadian Oilsands companies and are planning substantial capital spending programs to develop the opportunities. The September report handed to the government recommended some “Draconian” changes. The proposals sent investors to the exits.
It has become apparent to investors, but more importantly, to the Alberta government, that the Panel, which is made up of non-industry people, used faulty assumptions as well faulty data (outdated 2005 cost data) in their evaluations that have resulted in misguided recommendations. While we believe there is room to alter the royalty regime somewhat in the Oilsands segment, the recommended measures to the conventional oil and gas segment are entirely inappropriate. While the Oilsands reserves represent the future of the Canadian oil patch, the conventional basin is old, mature and higher cost. The bigger players have largely left the conventional basin to the smaller independents to exploit. While we believe the conventional basin to be a profitable business, it is nevertheless, too small for the likes of EXXON and BP.
The feedback in early October from the Alberta government appears to acknowledge the economic realities and is providing relief to investors. While the stocks are recovering as a result, the uncertainty is keeping most buyers on the sidelines. The Alberta government will offer more color in late October. We believe the proposed measures will be more reflective of the economic realities facing their energy basin. Today, we would expect Canadian energy shares to rally with the greater clarity.
Basic material share prices led the rebound in September, reversing the August movement. Time horizons lengthened somewhat as investors filtered through the sub-prime fallout to focus on the greater economic opportunity that continues unabated, in the emerging world. Commodity prices pushed forward during the month, led by the precious metals. Gold and Silver rallied 12-16% while Copper, Nickel and Lead advanced 10.6%, 14.2% and 8.2%, respectively. With the improving visibility, the Funds continued investing during the period. The Funds continued the bottom-feeding in the Uranium space that began in August. Spot uranium prices have given up most of this yearʼs gains having dropped from $138/lb to the recent $70/lb level. As is typical of market recoveries, the seniors led the rally, leaving the smaller players behind. Copper giant Freeport McMorran, for example, corrected from $100/share to the mid -sixties in the August downturn. The stock traded in the $115-120 area recently in October. We would expect the remaining group to catch-up as capital markets continue settling down.
While the lower dollar has provided support to all commodities, it has provided fuel to the precious metals group. Spot prices for both Iron Ore and Coal are much higher than last yearʼs term prices. With labour and energy prices also trending higher, we can expect steel prices to follow suit in the near future. Bullion finished the month at its highest level since 1980! Gold will likely play an increasing role in investorsʼ portfolios as they seek havens against both inflation and a lower dollar.
We remain focused on the economic momentum worldwide. The massive capital spending cycle globally is unprecedented! The global economic landscape continues to be re-shaped. The old manufacturing base in the western world will remain challenged competitively and will continue to work through their costly transitions. The worldʼs largest economy remains stretched and tired and its recent credit difficulties in its financial system will likely keep the Federal Reserve on high alert. Notwithstanding the inflation that has become evident in the U.S. (largely as a result of the emerging worldʼs rapid growth), the Federal Reserve will likely err on the side of the weak economy and likely lower rates further. The economic weakness in the U.S. is seemingly playing well into the hands of the emerging nations, whose growth continues unabated. Now, however, it grows in a lower interest rate world than that which existed only months ago. Stay focused on the growth in the emerging world!